(Image taken from here)
A matter that can potentially attract considerable controversy has recently been brought to the notice of the Spicy IP team. The readers would no doubt be familiar with the recent Enercon dispute (reported here, here and here) and the case involving Natco, wherein Indian Patent Office had granted its first compulsory license in a pharmaceutical product (reported here and here). Since these two decisions, the German government, policy makers and industry-owners have been known to have raised quite a hue and cry about the domestic protectionist standards and regressive IP regime in India, as well as lack of adequate enforcement mechanism to IP owned by foreign entities. However, the table seems to have been turned insofar as the German judiciary is concerned, as the following matter is likely to reveal.
The matter involves Confidign Solutions Pvt. Ltd. (Ideafarms), an Indian company and Continental A.G., a German body corporate. The two companies had originally entered into a Services Contract in 2004, which was replaced by a Business Partnership Agreement (BPA) in 2008. According to Continental’s wishes, the BPA was sought to be terminated in 2010 for a negotiated settlement. The effect of the termination agreement was an apparent unequivocal termination of all the previous agreements entered into between these two companies.
Since 2007, Continental had been using a software framework of Ideafarms, named InDExT, a general-purpose / generic software framework for storing, retrieving and approving documents and managing business processes through a proprietary Visual Navigation system. This software had been customised for Continental as QMD, Quality Management Documentation by Ideafarms for a separate customization fee and installed in the Germany-based servers of Continental under a click-wrap license. The licence agreement was accepted by Continental and was also available for viewing through the software interface itself.
In 2010, when Continental signed the aforesaid termination agreement, it was liable to pay the license fee for the said software for the year 2010. Ideafarms requested Continental to pay the said licence fees in advance and also offered that if Continental did not wish to continue using the software, it should uninstall the software from all its servers and confirm the same to Ideafarms. However, Continental apparently did not reply to such overtures; nor did it dispute Ideafarm’s ownership of the software. On the contrary, it proceeded to negotiate licence fees/transfer charges for the software vide e-mail communications. An offer of 50000 Euros had apparently been made on Continental’s part for transfer of rights of the software. However, the two companies failed to arrive at a mutually agreeable license fee, following which, Ideafarms insisted that Continental uninstall the software pending negotiations.
Continental did not pay any heed to such insistence and approximately 5 months later in May, 2010, it claimed that Ideafarms had granted perpetual rights to Continental to use such software under a so-called surviving IP clause of the original Services Agreement. Following this claim, Continental filed a pre-emptive suit in the Regional Court of Hannover, asking for a declaration that it had been given the rights to use the software. Interestingly, Continental never claimed ownership of the software in the course of its claim. However, it pleaded that in case the Court held against it, Continental’s liability should be limited to 16000 Euros only. This number was apparently arrived at by calculating pro-rated development cost by some convoluted formula as well as computing licence fees as a fraction of the customization charges. However, Ideafarms’ contention was that the software under consideration were not covered under any contract as such, only a license agreement between the two parties.
Ideafarms filed its own defence before the Court and made a counterclaim of approximately 5 million Euros to cover licence fees and damages, along with the hefty court-fee of approximately 50000 Euros besides professional and legal expenses incurred. The hearing was originally due on January 25, 2012. A day before the hearing, the presiding judge got in touch with the two parties in what can only resemble an effort to broker a settlement/negotiation. In course of such an event, Continental apparently offered as a part of the settlement to cease and desist from using the software as well as customized versions thereof (the license agreement covered these customized versions too). This can, of course, be perceived as an admission on Continental’s part of the ownership of the software still resting squarely with Ideafarms. It was also suggested that the two parties agree to a settlement that would revolve around an agreement for further services for a pre-determined remuneration, instead of a ‘license fee’. This would in effect mean that the parties could carry on the negotiation even when the case is being heard, by way of a technicality.
As per Ideafarms version goes, the learned judge then proceeded to inform the parties that the hearing the day after would most likely be based on the discussion of a settlement, especially given that one of the two lay judges was going to be replaced shortly afterwards with a new one. The judge also made it clear that in case the Court is made to finally decide the matter, take a final call on the matter, it was likely that one of the parties would have to bear the bulk of the costs of the proceedings. And that even if Ideafarms prevailed on merits, the amount of damages to be awarded would fall far below the amount sought by Ideafarms.
While the author of this post does not profess to be an expert in German law or the German judicial code of conduct for that matter, such an action appears to him to be grossly inconsistent with the role that ought to be played by a judge before the date of hearing of a matter. It is not entirely unknown for judges to have advised parties for a settlement by giving broad hints on the apparent merits of the case, which party enjoys a prima facie stronger position etc. However, a judge taking a call on the whether he would grant full quantum of damages even before hearing the parties seems unprecedented. Settlements are not undesirable –on the contrary, they always comprise a preferred means of resolving any dispute. The question is to what extent can judges indicate their predisposition to a matter while driving down a settlement. This appears to be a complex policy matter, on which the readers can expect subsequent posts to be devoted.
The matter, however, proceeded to be heard the next day, wherein the Court acted in a manner that did not conform with the idea of fairness or neutrality. Without allowing a trial, it rejected Ideafarms’ counter claim and instead of allowing any argument on Ideafarms’ part as to what might constitute a valid licence/transfer fee, it summarily awarded Continental the rights to the software. While the related provision of the BPA had been worded considerably strictly, the Court held the said provision would be open to interpretation under Section 157 of the German Civil Code (which states that “Contracts are to be interpreted as required by good faith, taking customary practice into consideration.”). The question is whether the “customary practice” is only meant to include German customary practice as per convenience.
The only concession allowed to Ideafarms by the Court was to direct Continental to pay the former off for an outstanding service invoice. The invoice is in no way related to the licensing issue, but is for prior work done by Ideafarms for Continental. Therefore, it remains unclear why that was brought into the current matter at all. In what appears to be an even more bizarre turn of events, Ideafarms was directed to pay Continental’s share of cost of proceedings (amounting to almost INR 20 lakhs), despite the fact that it was Continental that had initiated a pre-emptive suit in its own country of origin! Nor is Ideafarms left with a commercially viable option to appeal the judgment, since that would require, as per German law, the prospective appellant to provide a prohibitive security of almost INR 1 crores. Such an amount is likely to prove ruinous to a small-scale company like Ideafarms in course of business.
Overall, even setting aside the procedural irregularities that the German judge might or might not have indulged in, the decision prima facie appears to contain several laches, such as how could Continental have been awarded the software rights without a trial, when it had never claimed ownership, nor had disputed Ideafarms’ copyright over the same. Even the licensing issue was not settled by the Court.
This matter assumes particular significance because India and Germany are scheduled to engage in bilateral talks in this week, (May 9 to may 11) wherein Germany’s grievances at India’s IP protection regime and law enforcement following Enercon and Natco are almost certain to be raised. In the light of such an event, India can perhaps ask Germany certain pointed questions in the light of the desirability of the physician healing himself at first. The matter under consideration can thus also prove to be a source of invaluable diplomatic currency, especially given that Ideafarms is currently seeking redress of its grievance through the Administrative and Diplomatic arms of the Government of India and there have already been several debates as to whether India should actively support its small-scale companies in their unequal battle against giant foreign corporations to protect their IP (see here).
Caveat: As a matter of record, let it be noted that several facts mentioned above (particularly those relating to the role played by the German judiciary in the settlement talks etc.) were facts that were conveyed to the SpicyIP team by Ideafarms and not susceptible to independent verification.